China will overwhelm us! Mmm…. Not so fast.

America is going through one of its periodic crises of confidence (1) in which large segments of the population are worried that our time is past and someone else will come to dominate the world. Roll up the flag, forget anything about being exceptional, and start learning Chinese; our new masters are on the way.

Ehhh… Hold on a minute there, Doc.

Those fears are predicated on our own economic problems (serious ones, not making light of them at all) and are compounded by a president and a ruling party that are trying to make us be people we aren’t and do things we’re almost genetically predisposed against. The strain and turmoil caused by all that makes us look at a rising power like China and think our run is done; it’s their turn, now.

Except they have serious, deep problems of their own. Among them are a housing bubble and a huge number of bad loans. Sound familiar?

And yet … A closer look at the Chinese economy reveals that an astonishingly large part of what is going on today is investment in urban residential real estate, which is growing at more than 25 percent a year. The evidence was all around me as I drove through my sample of Chinese provinces. On the outskirts of every city I saw, there was a veritable forest of apartment blocks under construction.

These are the fruits of China’s own stimulus. When the Western economies first tanked in 2008–09, China’s communist rulers ordered the country’s banks to lend, lend, lend. The biggest borrowers were property developers and local governments.

With inflation above 6 percent and the stock market down, the new Chinese middle class has gotten in on the act. An unknowable proportion of these new apartments have been bought as investments by people who already own one or more. With new-property prices up about 20 percent in just two years, who can blame them?

Sound familiar? Yes, this looks a lot like a real-estate bubble—with Chinese characteristics. As for debt problems, Chinese bank loans were 97 percent of GDP in 2008. Now they’re at 120 percent.

This isn’t the only article to mention the vast money (and debt) being sunk into real estate in China in perhaps irrationally exuberant hopes of big returns. Check out this piece on China’s “ghost cities” (3)

Take the New South China Mall, in Dongguan. The Dateline crew took a tour of the place, which has been 99 percent vacant since it opened in 2005, and the result is one of the most depressing things I have ever watched. Six years after its creation, what is touted as the largest mall in the world sits almost empty. One of the very few stores that’s in business is a toy shop, where the wistful owner spends his days dusting children’s bikes that no child will ever ride. He is lucky if he makes one sale a day.

And it’s not just that mall that sits empty. So do rows of massive skyscraper apartment buildings and central business districts in new cities around the country. This is at least part of the reality behind the megacities the Chinese are creating. “All the shops in this mall are empty,” says reporter Adrian Brown, walking down an immaculate but deserted street in one of the new cities, this one in north-central China. “Not that that worries the government, because they’re simply more concerned with maintaining economic growth, and one way of achieving that is building cities like this one.”

According to Hong Kong-based real estate analyst Gillem Tulloch, who is interviewed in the piece, the housing units are priced well above what an average Chinese person can afford. The result, he says, is a housing bubble that is terrifying in size, “a property bubble like which I don’t think we’ve ever seen,” he says. “It will make the United States pale in comparison. It’s said that there’s around 64 million empty apartments…. It’s essentially the modern equivalent of building pyramids. It doesn’t add to the betterment of people’s lives, all it does is it promotes GDP.”

And all this building is supported by bank loans, the extent of which has started to worry Beijing to the point that they’re laying down new regulations, which has created an underground banking economy with its own set of bad loans on top of the already-vast public bad debt.

When their crash hits –and it will, inevitably– it will undoubtedly affect their global reach, just as ours is being hindered by our problems. Only, given the potential size of the bad debt, I suspect theirs will be far worse and far more disruptive, including affecting the stability of their political system, which has little experience with the ups and downs of market economics. (4)

So let’s not write ourselves off and turn China into SuperNation just yet; they may soon be finding they’ve swallowed economic Kryptonite.

RELATED: Don’t get the impression that I’m dismissing the strategic challenge and even threat posed by a rising, aggressive China. In my opinion, the dynamics resemble that of Imperial Germany’s rise before World War I, when the new power became the rival of the guardian of the old order, Great Britain. For something to chew on, consider that China has just launched its first blue-water aircraft carrier. Gee, I wonder who that’s aimed at? Meanwhile, this must-read article by J.E. Dyer looks at Chinese intentions in the South China Sea and, by extension, one of the world’s major choke-points, the Strait of Malacca. The Dragon and the Eagle are keeping an a wary eye on each other, believe me.

Footnotes:
(1) I’m old enough to remember the 70s and 80s when Japan, Inc., was going to eat our lunch. How’d that turn out?
(2) Smart man, should be on everyone’s must-read list. Have fun as he rips Obama’s clueless foreign policy.
(3) Here’s a fascinating satellite pictorial.
(4) How China’s rulers will react to that crisis, however, should be worrisome.

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4 Responses to "China will overwhelm us! Mmm…. Not so fast."

Indeed, there are too many people being overly impressed with Chinese “glamor” project…those who are dazzled by high-speed rail fail to note that much of the investment in this has come at the expense of investment in the less-glamorous, but vitally important, freight lines, as a Chinese railway expert (and brave man!) recently noted. But I doubt if the typical NYT columnist, or television equivalent, understands enough about transportation/logistics to even comprehend the importance of freight rail.

Re the comparison with Imperial German….at least we can hope that the Chinese leadership is a little less weird than Kaiser Bill.

Yes, I am old enough to remember the 80s when it was the Japanese who were going to overwhelm us (economically). Or so the ‘experts’ of the day proclaimed.

The Chicomm’s do indeed have some serious problems of their own. One of the largest (and almost never reported) problems the Masters of Bejing are facing is the direct result of their forced abortion one-child per family policy. For those unfamiliar, the problem is they’ve aborted millions of girl babies in favor of male children (who are much more prized). Now there’s an immense disparity in numbers between the sexes. Millions of young Chinese men have zero chance of landing a Chinese wife.

China has a number of problems very similar to those of Japan in 1938-41. They are unable to project power as long as the US has strong allies in Japan, Taiwan and Singapore as these three areas deny China unfettered access to the Sea Lines Of Control necessary to secure their import of materials and their export of finished goods. China cannot feed their population if their internal road, waterway and rail networks are interdicted by even so much as a few submarine-launched Tomahawks. They have a long way to go to being able to provide for all-weather night over-water air power projection, so it would be difficult for them to invade Taiwan if it was seriously opposed. Their immediate neighbors both fear and hate them, and with good reason. They built a dam whose destruction would cause a collapse of their economy, normally only possible by prolonged strategic bombardment, blockade, or the use of nukes. They haven’t fought a major war since the early fifties, and have no experience in modern, high-mobilty industrial warfare. Their economy is based on factors they can neither control nor defend, like oil access, raw material imports, and global seabourne commerce. They have a rising middle class that is becoming increasingly averse to the kind of austerity needed for a country of their size and limited resources to engage in a protracted conflict. They have a number of ethnic minorities that they can barely keep a lid on now.

China is patient, but if a group of militarists rise to power in the central government, like what happened in Japan in the 1930’s, war may be the only way out. I personally think we will either have a major war with them or that they will collapse into civil war in the next 10-15 years.